A fee charged for paying off a loan or lease early, if the contract allows.
For example, a business refinances its equipment loan 2 years before the end of a 5-year fixed-rate term and incurs a prepayment penalty equal to 3 months' interest — approximately $1,800 — which the owner factors into the decision to confirm the refinance still saves money overall.
Why it matters: It traps the borrower into a high-interest loan; understanding these penalties is critical before trying to refinance or sell an asset.
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